Subscribe to Power Grid Corporation FPO, says Emkay

MUMBAI: Emkay Global Financial Services has advised investors to 'Subscribe' to the follow-on public issue of Power Grid Corporation. The FPO is cheap on absolute and relative basis the brokerage says.

"At higher band of Rs 90/share, the PGCIL FPO is valued at 1.5x FY13E Book. This is cheap looking at core ROE of ~22.5% in FY13E. Also PGCIL FPO is significantly undervalued compared with the current valuations of other regulated utilities like NTPC.

NTPC is trading at 2.1xFY13E Book value with core ROE of 24%. However we highlight that 3% of NTPC's core ROE is from UI which is linked to short term prices. Whereas in case of Power Grid, the core ROE of 22.5% is totally dependent on volumes and not on prices.

With (1) Operating cash flow yield of 16% in FY12E, (2) regulated monopoly business with certainty of numbers, (3) execution track record of nearly 100% and (4) further potential of 1% REO upside from STOA - we see PGCIL as a much better investment option.

We have valued PGCIL on SoTP of its core Book and cash and investments. The (1) regulated equity of Rs 182 billion at the end of FY13E is valued at 2.5x and (2) equity funded cash and investments are valued at 1x (no option value considered).

We recommend subscribe to the FPO with November 11 price target of Rs 128/share. We even remain positive on the stock at CMP of Rs 98/share at which the stock trades at 1.7x FY13E Book," the report said.

The company has plans to raise around Rs 7600 crore by issuing shares in the price-band of Rs 85-90 per share. The issue closes Friday.